Foreign exchange rates are affected in many ways, some beneficial and some not. Before investing in foreign currencies, it is important to be aware of how the market can fluctuate, which could mean the difference between a successful investment, and bottoming out. Here are the three key factors that affect foreign exchange rates:
1. Interest rates. Investors are likely to put their money in a currency that provides high interest rates, and will tend to pull out of a currency once this high interest rate drops. You can see this kind of action in home equity release. Since the value of a currency is largely dependent on foreign investments, the more money invested in a currency will in turn make its rates increase. Even a high valued currency will lose its power once a majority of its investors pull out.
2. Foreign relations policy. Depending on how much one nation trades with another will greatly affect the value of one currency against another. A nation will earn more if their imports are less than their exports. All the highest currency rates in the world are owned by those nations that have a high export to import ratio.
3. Inflation. As pointed out in 1), a country’s currency rate and value are largely influenced by foreign investment. When a nation has a rate of inflation, investors will indeed shy away from such a currency, which will directly affect its value. Conversely, if the rate of inflation is comparatively low, then investors will retain their currency, which will raise its exchange rate and value.
Before investing in a currency, whether as a means to sustain a living or if you are planning a vacation within the next year, it is imperative that you become aware of the nation’s foreign policy, interest rates, and their rate of inflation. Buy foreign currency blindly is a sure way to lose money on the exchange. The key for any government is to do what is necessary to keep it stable.